Product market efficiency: The bright side of myopic, uninformed, and passive external finance

Noe, Thomas (2009) Product market efficiency: The bright side of myopic, uninformed, and passive external finance. In: Accounting and Finance Research Seminar, 11 November 2009, Lancaster University Management School, UK.

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Abstract

Short-term financial claims held by uninformed outside investors impose a tax on insider opportunism by diluting the ownership stake of opportunistic owner-managers. By thus limiting managerial opportunism, short-term financing increases firm value and social welfare. When given a choice, owner-managers will prefer socially beneficial short-term external financing over internal financing. We show that these results are equilibrium outcomes of a model where firms can act opportunistically in product markets. Moreover, we document the same beneficial effect of short-term external finance in a laboratory experiment implementing this game.

Item Type: Conference or Workshop Item (Paper)
Keywords: Adverse selection; Financing; Reputation
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 26 Feb 2012 18:15
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/2900

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